Parliament has proposed some positive changes to inheritance tax. This month, Ben Brown looks at how they could benefit you, if they are implemented…
An All-Party Parliamentary Group (APPG) on inheritance and intergenerational fairness recently recommended simplifying the inheritance tax rules.
The government didn’t announce any changes at the recent budget and it is likely it would take some time for them to be introduced, as a consultation would be necessary. However, they could be beneficial for many people and here’s why:
What is the current inheritance tax position?
Inheritance tax is generally paid on estates worth more than £325,000 at a rate of 40%. This threshold can be raised to £500,000, if you qualify for the full residence nil rate band and up to £1 million for married couples.
There are exceptions, however. Gifts left to spouses and charities are not included in a person’s estate for tax purposes and businesses or agricultural property may be subject to reliefs or be completely exempt.
Individuals can also make certain gifts without incurring inheritance tax. You receive an annual exemption of £3,000, whilst also being able to make small gifts of £250. Outside of these rules, it is worth noting tax may still be charged on gifts made up to seven years prior to death.
Some gifts are classed as ‘chargeable lifetime transfers,’ including those to trusts. They may incur an immediate inheritance tax charge at 20%, if there is no nil rate band or exemptions available and more tax could be payable if you die within seven years of them being made.
How will the proposed changes affect the current rules?
The APPG has suggested reducing the rate of inheritance tax to 10%, or 20% on the balance of estates worth more than £2 million.
Gifts to spouses and charities would remain exempt, although exclusions for businesses and agricultural property would be abolished. Instead, there would be an option to pay the tax due on these assets over a ten-year period.
Importantly, gifts made in the seven years before death would no longer be subject to tax. A single annual exemption of £30,000 has been proposed, with gifts over this value incurring
lifetime inheritance tax at 10% when made. This would replace the various exemptions and lifetime chargeable transfers in place currently.
What does this mean for me?
The intention is that these reforms would create a fairer system and encourage less tax avoidance. At the moment, fewer than 5% of estates pay inheritance tax.
For those of you with assets that would incur tax, the proposed changes mean more money can go to those specified in your will, or in accordance with the intestacy rules if you don’t have one.
Likewise, the £30,000 annual exemption on gifts could give you greater scope to share your wealth during your lifetime, without tax consequences and simplifies the current position.
Entrepreneurs would be negatively impacted by the removal of business property relief, but by allowing beneficiaries to pay the tax in instalments over ten years, any need to sell your company to settle the bill could be avoided.
For more information about these proposed changes to inheritance tax and their likely implementation, telephone (0114) 218 4000, email: info@tayloremmet.co.uk or complete this form.
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